MoneyWeek roundup: A bad week for old-fashioned retailers

The economy might be recovering. But it’s still a case of carnage on the High Street for some of Britain’s biggest retailers.

The big news this week was the poor performances of several of Britain’s biggest shops and supermarkets. On Wednesday, my colleague Ed Bowsher took a more detailed look at the most high-profile ‘victims’: Marks & Spencer, Morrisons and Tesco.

Despite the poor results, shares in M&S actually went up. Apart from the fact that it could have been worse, Ed notes that, “some investors were impressed by the good news on food sales – like-for-like food sales rose 1.6% in the quarter” while “the online performance was also pretty good – sales rose by 23%”.

However, “M&S still hasn’t sorted out its longstanding problem with womenswear… we’ve just seen the tenth quarter in a row of declining clothes sales at M&S”. Last minute price-cutting may have prevented a total disaster, but that’s “a dangerous game only played by desperate retailers”, because it makes customers wary of paying full price for anything in the future.

As for supermarket group Morrisons – it did really badly. “Like-for-like sales slumped 5.6%, and profits will now be lower than the market had expected”. The big problems are competition from Aldi and Lidl, and its lack of an online arm.

While it will finally start to sell online this year, it’ll struggle to catch up with its rivals, “and profitability will be even further away”. Even though it is now on a relatively low price/earnings ratio of ten, Ed is “still not tempted to buy” – though Phil Oakley, writing in this week’s MoneyWeek magazine, thinks there’s a crafty way that a buyer could unlock value from Morrisons.

Tesco, meanwhile, saw a 2.4% drop in sales in the six weeks before Christmas, “even worse than analysts had expected”. While online sales rose by 14%, this leaves its large out-of-town hypermarkets are “in danger of becoming white elephants”.

While Tesco is trying to broaden its appeal, adding other facilities, including “restaurants, yoga classes and more”, he recommends you hold off investing “until we get more evidence that it’s actually working”. All three companies are also being squeezed by low-end competition from Aldi and Lidl, and high-end competition from Waitrose and M&S.

Does Ed like any retailer? Yes – Next, which he tipped back in October. Since it’s one retailer that’s done very well this Christmas, he’s “very happy” to hang onto his shares.

A red alert for investors

Meanwhile, Paul Hill has issued a “red alert” to readers of his Precision Guided Investments newsletter. He’s extremely worried about prospects for shares in general, warning that, “it might not be a happy year for your investments”.

And “with inflationary pressures currently subdued, there isn’t much chance for businesses to lift prices without damaging volumes”.

But unrealistic earnings expectations aren’t the only problem. He notes that, “Chinese GDP growth is slowing”, while “many emerging markets – like Turkey, India, Brazil and Thailand – are also displaying worrying distress signs”. Another worry is rising government bond yields, which “could increase borrowing costs, pop bloated property bubbles and reduce the attraction of equities over fixed income assets”.

Finally, sky-high valuations mean that earnings per share rates will not “get the same kind of boost that they have done from the many stock buybacks that have occurred over the past few years”. Overall, Paul expects “a possible 10%-20% correction” – and with the reporting season kicking off this week, it could start soon.

A great year for Dr Mike Tubbs

One star performer this year was Dr Mike Tubbs’ Research Investments newsletter. The portfolio was helped by the fact that the biotech and health sectors did well, as did small cap shares and those in the US.

However, it wasn’t just down to being in the right place in the right time. Indeed, his top performers included large firms, non-biotechs and European firms. Tubbs thinks this shows the importance of picking “good companies within each sector, size range and market”.

To find the hidden stars in each sector, he hunts for companies with “high and well-directed research and development investment”. Such investment keeps a company “developing its range of products and services to get further ahead of competitors”. You can find out more here.

While it may sound like an intimidating jargon term, ‘cloud’ computing is “really only an extension of web services you already know”. For example, “email or Facebook lets you use its storage, processing power and software from any location”.

The overall aim is to be able to “access film, social media, personal and work-related documents from wherever we are, and with whatever devices come to hand”. The big advantage is that the user “no longer has to worry about backing up data and all the security issues that surround it”. It also means that firms are “no longer held hostage to some computer geek”.

Of course, some people argue that “the cloud isn’t secure”, or are “worried about somebody hacking their data, or of downloading some sort of virus by accident”. However, Bengt argues that, “far from increasing these risks, cloud computing can considerably reduce them”. Indeed, “you can’t download anything onto these cloud-based machines, which means no viruses and other nasties”.

While there are fears about reliability, a wide range of companies “provide cloud-based services and have considerable skill in blocking out malicious threats and keeping all your files safe”. Given that “business and personal life is increasingly dependent on the web anyway”, most of the fears are “overblown”.

Overall, Bengt thinks that this year “will see the continued proliferation of so-called smart devices”, which are “all dependent on cloud computing”. He also predicts that, “individuals and organisations will become more dependent on the cloud too”.

As a result he particularly likes “cloud computing specialist Iomart (LSE: IOM)”. Having tipped it at £2.36 in June, the price is now around £2.60. While he promises a more detailed update in the near future, he recommends that you “have a look at my ten reasons for proposing Iomart in the first place”.

Gold miners could be worth a punt

While it started the year at around $1,700 an ounce, it ended turbulent year just above $1,200. City Analysts believe that worse is to come. For instance, Moody’s have set a price target of $1,100 while Goldman is forecasting a drop to $1,050.

But “gold is so widely loathed at the moment that we can see various reasons why it might do better than most people think this year”. Such a rebound “could be very good for the one asset class that is even more hated than gold – gold miners”.

One indication that the price may have hit a trough is that the big-name investors are dumping gold. Often when “the last bull turns bearish”, it’s a sign that “there’s no one left to sell the market”.

For example, hedge fund titan John Paulson’s gold fund lost nearly two-thirds of its value last year. As a result, he ‘rebranded’ the fund and “advised investors not to put any more money into it”. At the same time, “George Soros and Daniel Loeb (who runs the $14bn Third Point Hedge Fund) have also sold their holdings in the main gold exchange-traded fund”.

All these factors mean that, “the ECB could be forced to turn on the printing presses, which would push up the value of gold”. At the same time, retail demand from Asia remains strong, “with buyers looking for a home from their savings”. Indeed, the fall in the price of gold has led to a surge in Chinese sales, while the Indian restrictions on gold imports look likely to be lifted.

Instead of buying a gold though, I suggest you look at the mining sector. Due to falling prices and rising costs, many gold miners “trade at very low multiples of current earnings”, which means that, “there are potential bargains”.

One “very interesting” company is Medusa Mining (LSE: MML). As a low-cost gold producer, “it should keep turning a profit, even if the gold price falls further”. It has a price/earnings ratio of 7.3 and trades at a premium of only 3% to its net assets. My colleague Simon Popple has also put together a report on this sector.

• Dr Mike Tubbs’ Research Investments and Metals and Miners are regulated products issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Past performance and forecasts are not a reliable indicator of future results. Please seek independent financial advice if necessary. Customer services: 0207 633 3600.

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